GED Social Studies Practice Test: The Four Types of Economies

Traditional Economies These are usually found in rural or isolated communities (today, many are found in less developed areas of Asia and Africa). A traditional economy is just that — it relies on the traditions of society. People carry out economic traditions in much the same way as their forbearers did. If your community is on the coast, you’ll probably fish or repair nets. If you live on a plain, you may well be involved in the raising of cattle. What is produced? That’s easy: what the society needs. Goods and services are often shared, and money is sometimes not used; trading (barter) is the medium of exchange. Often, traditional economies rely almost exclusively on the natural resources that are present, and there may not be much technology. Often, the goods and services that are produced are shared among the inhabitants of the society. Examples of traditional economics may be found in the remote tribes deep within the Amazon rainforest and the Inuit (Eskimo) people of the far northern reaches of North America.

Command Economies We are used to a dazzling array of goods and services. Don’t like one brand of pen? Buy a different one. Tired of your clunker car? Buy a new and shiny car from a different company. In a command economy, the government decides the three basic economic questions: what to produce: how the goods should be produced; and for whom the goods are produced. The most recent examples of command economies are the communist economies of the now-defunct Soviet Union and its satellite nations.

Market Economies Market regulation is governed by self-interest. One of the first professional economists was Adam Smith (1723-1790), whose work, An Inquiry into the Wealth of Nations is considered the first work of economic thought.

Smith believed that an “invisible hand” ruled the interrelationships between producers and consumers. A candle maker wants to make money, and so does a baker. A consumer needs to buy candles (remember, Smith was writing in the 1700s) and bread. An “invisible hand” (a very Enlightenment-era idea) would bring the producer and the consumer together to make an exchange. Self interest is the name of the game. It’s the incentive that drives people to do what they do. If the candle maker and baker produce quality goods, people will buy them. If the candles and bread are too expensive, or the quality is too poor, then people won’t buy them. It’s in everyone’s self-interest, then, to be the best producer (or consumer) she or he can be. No one tells producers what to make, and no one tells consumers what to buy. You may recall the term laissez-faire (French for “let it be”). A market economy is a laissez-faire economy. Pure market economics sound efficient, but competition can be brutal, and there are usually winners and losers. Recall the chapters you have read on American business in which large companies (such as the railroads and steel companies) took brutal advantage of their workers.

The economic system in market economies is capitalism, in which there is private ownership of the factors of production.

Mixed Economies What we have in the United States is a mix of a market economy with government regulation (remember learning about Food and Drug Administration in the Progressive Era and the New Deal agencies, such as the Securities and Exchange Commission and the Federal Deposit Insurance Corporation) that helps “smooth the rough edges” (to prevent fraud, exploitation, and unfair business practices). For example, in a true market economy, people with no money wouldn’t be able to buy anything and would likely starve or freeze to death. In the United States, we have Social Security, food stamps, and other programs to help the less fortunate. The government may also play a role in the economy by regulating certain industries (think of, say, fuel efficiency standards for cars or reviewing the safety of pharmaceuticals). Most of the nations of Western Europe, Asia, and South America are mixed economies, as are the United States and Australia. Exactly how much of a role the government plays in the economy is a function of culture, tradition, and societal expectations.

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